I do think that Draen Miller is one of

the best macro investors we've had.

Recification is overrated. Just go all

in on three things and then watch the

basket carefully. But does it mean watch

the basket carefully? If your choices

are wrong, you're going to blow up

anyway. You can hear from Drak Miller

and Soros about this, but you're not

going to hear from the thousands of

managers that were bankrupt trying

[music] the same approach. It's a lot

about survivorship bias as well.

>> You talked about that silver decline.

The entire [music] market moved in the

same direction.

>> If you have 40 to 50 big teams a year,

you have no idea which ones are going to

work. So you only know that you're going

to be right let's say 50% of the times

[music] if you have 12 themes but those

12 themes when you really look into them

they are pretty much two themes higher

interest rates and stronger equity

markets [music] then I'm sorry but you

don't have 12 trades you have two then

you end up in the Draen Miller thing of

basically put two or [music] three

themes and watch the basket carefully

Trump has been a very complicating

factor here the CAPM model for example

they will have an additional error term

which is the Trump error term is is

really a big and exogenous fall

injection variable in anything.

Hey, if you want to get access to these

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together.

>> Al, thank you so much for doing this,

Ethan. It's a pleasure to be here. Avid

listener of basically each one of the

odds and open episodes. So very excited

to be on the other side of the seat this

time.

>> Amazing.

What is your single biggest source of

edge in macro trading?

>> I would say it's uh two things. The

first is deeply thinking about money,

money creation in general and the

monetary system. And the second one is

following a very strict process of

sizing position and managing upside and

downside risks. At the end of the day,

whoever has been ever successful in

micro investing that doesn't mean I am.

Future will tell us. But whoever has

been before me has almost ever applied a

few principles that I think are

evergreen when it comes to macro

investing. So it seems very easy on

paper right you just apply the process

and then there you go problem is

actually you have to apply it. So okay

so what are the common characteristics

that I also try common features I also

try to put on first one is every

directional fundamentalbased macro

investor like I am will be right

somewhere between 45 and 55% of the

times notice the band here because in

any given year you might be luckier a

bit less unlucky your models might work

better or worse but more or less let's

say 50% of the times

that's something people should reflect

If you're right 50% of the times, it

means you're wrong 50% of the times,

which is quite quite something to

really, you know, it it hits you

psychologically. You need to be able to

handle your losses in a way that is, in

my opinion, systematized. So

this is one angle. Okay. So once you

understand you're wrong 50% of the times

on average, then you need to work around

this problem. And then the second thing

I would say is um macro is very

complicated because you trade basically

three asset classes rates currencies and

equities. You trade three asset classes

across maybe 20 to 25 jurisdictions

depending of your mandate. But if you're

a global macro investor it's anything

from US, Europe and Japan big three

developed markets to emerging markets

somewhere around the world. So that's a

lot of things going on at the same time

and that means you have to be very

adaptive with your process. But there

are a few things that never change and

what never changes is how the monetary

system works because we have built it

ourselves. I mean the fiat system and

how we print money or destroy money is

always the same. Uh money gets created

in a certain way and destroyed in a

certain way. So that's what we have

chosen to use as a one of our principal

anchor to determine where future nominal

growth is going to be. And when you ask

me what's my edge, that's a very hard

question. But I would say thinking and

understanding deeply the monetary system

is something that we try our best hand

at.

How do you make sense of it all? I mean

as you mentioned macro investors, you're

trading three different asset classes

and depending on your mandate, you know,

tons of jurisdictions.

How do you make sense of the global

financial system when you know you're

one guy and you you know even with the

team there's so much happening at any

given one at any given moment what do

you do so

let's talk about the monetary part of

our idea generation I mean if you're a

macro investor you will probably

generate your ideas two ways the first

is the good old newspaper reading which

these days is Bloomberg headline reading

or whatever which basically really means

you listen to the game masters as my

mentor used to say which is politicians

and central bankers. So you try to

understand the reaction function. What

are they thinking? What are their

incentive schemes? This is fully

qualitative if you wish and that's still

a part of the idea generation. But what

you just said is very important because

if you're looking instead at

macroeconomic variables so business

cycles basically across 25 countries

hitting three asset classes that's a

lot. You need to standardize your

thinking. You need to build frameworks.

So we did we have many frameworks that

we use but one around monetary uh the

money creation or destruction I think is

very important and that's something I

would like to discuss. So

in my prior experience before uh the

research company and before uh founding

the hedge fund

I worked at a very large global bank and

one of the very useful things was you

are in the belly of the beast. can

basically you are the recipient of

quantitative easing, quantitative

tightening, uh bank reserves, uh TLTO

for Europe, you know, all these monetary

operations are basically you are the

recipient or you are in the very midst

of the action. So you can actually see

what happens if you pay attention, you

can actually see what happens. What I

realized back there is that banks what

is commonly known as liquidity, which is

nothing else that the bank reserves. So

the amount of money that commercial

banks deposit overnight at the central

bank those are called bank reserves and

often refer referred us to liquidity

they are merely a token they are money

for banks and banks only it's a closed

system so I can use the bank reserves to

park them back at the European Central

Bank or the Federal Reserve or I can use

reserves to make a transaction with

another bank which means I can lend them

money I can do a repo a reverse repo I

can buy bonds from them but only from

them and from no nobody else. So when I

was reading very popular theories back

in 2020 for example that uh or even

before for Europe oh uh QE is uh

printing money and money is leading

that's why assets are going up. I always

wondered what does it exactly mean

because the money we are printing in

that case is nothing else than bank

reserves. So the central bank creates

new bank reserves. They have the power

to do that unilaterally and then they

will go and they will buy bonds of the

private sector and they will replace

basically the banks that own these bonds

will find themselves with bank reserves

instead. So the balance sheet will

change for a bank. They will sell the

bonds to the central bank and instead

they will have more of this token money

this bank reserves.

What what would be the link between

those bank reserves and the S&P 500

going up? The common link would be

according to people that oh these

reserves can be recycled into the market

and as liquidity not very well specified

under which mechanism would go up then

the S&P would go up. There was no direct

connection. There is no there is no

direct pipe between the bank reserves

and the S&P 500. So I started wondering

okay what happens with this bank

reserves. So that's one form of money

and what really happens is that banks

become much more aggressive with each

other. you know, they start buying bonds

off each other. They start they try to

get rid of these reserves. They're

pretty much useless. So, they try to

lend them to other banks or use them as

collateral for repo transactions.

Basically, the base of the pyramid of

the financial markets, which is the bond

market and the repo market becomes more

liquid, becomes more fluid. Okay? And

what really happens is that the

volatility drops. Volatility drops. The

central bank achieves to calm down

things. But there was no correlation

between these bank reserves being

created and inflation,

asset prices, stock markets. There was

no direct correlation. So I started

thinking who actually prints the money

that people use? Who prints what I call

today the real economy money?

And then you come to the conclusion that

banks actually do print money. Not the

central bank, but the commercial bank

prints money. And a commercial bank

prints money every time they lend money

to the real economy. Because effectively

what what happens is you get a mortgage

from a bank to buy a house that you

don't have the money to buy otherwise.

But what what's really happening is that

the bank is lending you money and that

means your bank deposits are going up.

So that means you have more money than

you had before. With this money, you

will go and buy a house from a seller by

the way. So the seller of the house will

now find himself with more bank

deposits. If you look at the balance

sheet level, what has happened is that

the bank loan is effectively new money

that before didn't exist and you just

got this money to go and buy the asset.

So the seller of the house now has more

money than before. Right? So the balance

sheet of the entire private sector has

gone up. Bank deposits have increased

but also liabilities have increased.

Clearly there is a debt attached to this

but that we have created more money. We

have as an economy more spending power

than before if banks are lending more.

And then I said okay well but if people

have more money to spend this must have

a correlation with nominal growth right

I mean the more money in the system

spendable money the more nominal growth

will go up and then we found out that

that was indeed the case and the second

actor in creating money was not the

central bank but it was the government.

So you had commercial banks via lending

and then you had the government via

fiscal deficits. So this deficit word is

very interesting because already gives

the connotation of something bad. It's a

deficit, you know, but the reality is

that I call it fiscal net spending

because what it is is that the

government spends money in the real

economy every time they do a deficit.

They're basically blowing a hole in

their old balance sheet, the government

balance sheet, but they're giving money

to the private sector. They're cutting

your taxes. They're giving checks like

they did during the pandemic. They're

basically giving new spendable money to

the private sector. So we started

looking into it and we said what if we

start tracking this real economy money

as a function of bank lending and

government deficits. And we basically

track this money creation and we try to

figure out whether it has any leading uh

tangible statistically significant

impact on nominal growth and eventually

asset prices.

And it does it does across jurisdictions

around the world because that's how the

monetary system works. There is no

really there is no difference between no

major difference between how money is

created between economies. Yes, you

might say in Europe it's it's more bank

lending driven for example in the US is

more government deficit driven. Yes, you

can say that for sure but at the end of

the day the total money creation you can

still track it. And then we realized

that it was more about the second

derivative than it was about the rate of

change because the fiat system is

designed around creating new debt and

creating new money. I mean governments

are basically on endless deficit

spending around the world now for like

maybe 15 to 20 years since the great

financial crisis. Government uh sorry uh

bank lending goes up. I mean total bank

assets and total bank liabilities go up

over time. So that means there is more

money getting created more credit for

the real economy over time. We have we

work on a fiat system where basically

there is no limit to the amount of fiat

money we can create. The limit is

inflation obviously but there is no hard

limit like there was during the gold

standard. There was a convertability

issue back then but now there is no

convertability issue really. I mean you

can print as much fiat money as you

want. Inflation will be the problem. Um

but what really matters is the second

derivative. So you can really see the

acceleration and deceleration or of this

real economy money printing not QE not

QT not bank reserves real economy money

creation. And that is a very interesting

driver of nominal growth and asset

prices.

>> Concluded from what you said is that the

real econ the second derivative of

studying the real economy money printing

is

a core part of your edge and how you

find opportunity in investing. Um

>> yes

>> give so once you've found those

opportunities how do you size the bets?

How do you position yourself so that the

entire portfolio will do well and make

sure that you're not too concentrated in

one bet in Europe versus the US versus

Japan? Would love to hear it.

I love this question. So Ethan, um I'm

going to say something a bit unpopular

here. I do think that Draen Miller is

one of the best macro investors we've

had, but I think there is a selection

bias and a survivorship bias when he

says certain things. things like

diversification is overrated. Just go

all in on three things and then watch

the basket carefully. What does it mean

watch the basket carefully? I mean, if

your choices are wrong, you're going to

blow up anyway. So, I do think that he

has an incredible knack for seeing

trends early and being concentrated and

big. But frankly, you can hear from

Draim Miller and Soros about this, but

you you're not going to hear from the

thousands of managers that were bankrupt

trying the same approach. So it's it's a

lot about survivorship bias as well. Um

so we try to do something very

different. And

for me if you are a long-term oriented

macro investor you're going to have 40

to 50 ideas a year something like this

spanning across 20 different countries.

You will have thematic ideas macro cycle

ideas.

But if you have 40 to 50 big teams a

year you have no idea which ones are

going to work exante. you just don't

know. So you only know that you're going

to be right let's say 50% of the times.

So what you really want to achieve is to

have 40 to 50 diversified themes in your

portfolio all sized in an equal way. So

what does it mean equal way? Equal way

means that all the teams should account

in principle for the same amount of

risk, the same amount of variability of

your P&L and they should have the same

amount of uh let's say magnitude in your

losses. Okay. So whether you are wrong

on some big call on the US macro or on

Japan or on Brazilian elections or

Hungarian elections,

it should somehow be a standardized

amount of units of risk that you put at

play there. And it's a bit of a

something that is also called risk

parity approach where effectively you

try to look at the volatility of the

asset class. You try to say okay look if

I am buying something that is very

volatile of course I'm going to put less

notion on it risk here because I know

that if I'm wrong this thing can go down

30 or 40% and therefore it's going to

detract from my performance according to

it volatility. So you standardize the

sizing of the position based on the

volatility of the asset class. Your stop

losses will be also commensurate to the

volatility of the asset class and

effectively you will end up with at any

point in time in your portfolio 10 12

teams at the same time. Maybe those

teams should absolutely be diversified

and that's a diff another topic we

should talk about. How do you ensure

that those teams are really diversified

but at least each single team should be

should account for the same amount of

risk and potential loss to your uh

portfolio. Then there is the

diversification problem. Let's say that

you have come up with a system that

sizes those trades based on V and puts a

stop loss at an equally distant standard

deviation event from depending on the

underlying asset.

Then if you have 12 teams, Ethan, but

those 12s when you really look into

them, they are pretty much two themes. I

mean the main driver of these 12 trades

is two things. Let's say higher interest

rates and stronger equity markets. Then

I'm sorry, but you don't have 12 trades,

you have two. and those two tra then you

end up in the Draen Miller thing of

basically put two or three themes and

watch the basket carefully right and

ideally you want to have a bigger degree

of diversification. So there are some

standard techniques for example you can

use a variance coariance matrix or a bar

on your portfolio. I find those

techniques to be okay but a bit tricky.

The first problem is that if you have

like a variance coariance matrix or a

bar, I mean the this these um techniques

tend to look at the average correlation

between your uh your your trades in your

portfolio. Problem is that in macro, as

long as it's average, it's actually

pretty fine. The problem is that when

it's not average, for example, take

Friday. We're recording on what was it?

Beginning of February and the last

trading day of January, we had a 32%

decline in silver. I'm sorry. There's

nothing average about that, right? So,

it's those two, three, five plus

standard deviation events in a day will

really reveal whether your portfolio

have a common denominator or not or

whether your trades are really

idiosyncratic expression of a single

vector of risk. And you need to run some

stress tests here. You need to look

really into the tails and say when there

is a destabilization when the S&P 500 is

drawing down two standard deviation when

the correlations across major asset

classes are going up and everything

trades the same way when I look at

periods like this in the past do I have

12 trades or do I have two trades in my

portfolio because everything starts to

behave the same way. So this is this is

very important because otherwise you end

up being very concentrated

>> 100%. I mean, you talked about that

silver decline. Um, the entire market

and all the asset classes moved in the

same same direction. Um, and now I find

it very interesting what you've said

about trying to have those 12

independent bets and making sure that

you're not just betting on two themes.

Um,

how did can you walk me through the

mechanism of how you went from 50 to 12

when you're in your idea generation? I

guess I guess I guess a better way to

frame it is when you're in your idea

generation process, how are you making

sure that you have 12 truly independent

bets, right? What does that mechanism

look like?

>> So when I said 50, I meant in a year of

course at any given snapshot of time,

you might have 10 or 12 in the portfolio

because some trades will lose money.

Remember 50% of the times you're wrong.

So you will be stopped out at some point

out of a trade and then hopefully you

will have a new idea that you add,

right? So it's 40 15 a year and on an

rolling basis you will have about 10 to

15 in your portfolio roughly. So how do

you shrink your universe? Well first of

all it's the correlation itself that

will shrink your universe because you

might have a lot of ideas Ethan but I

guarantee that when you really dig deep

into your tail risk uh correlation you

will find out that they're basically the

same driver. So it is already quite hard

to really have 10 to 12 ideas that have

nothing to do with each other. Uh it is

really really hard because often one

trade will be a derivative of a main

macro factor that you already have in

your portfolio. So trust me that is not

very hard to shrink it down to 10 or 12.

It's actually hard to get to 10 or 12.

Often you will have like three, four,

five different themes in your book and

then you have an idea and you look it up

and it's like ah well making you an

example like uh three four years ago no

maybe longer there used to be this very

tight correlation between um the yen and

global bond yields. So effectively when

global bond yields came down then the

yen went up as well. uh yen was seen as

a safe haven bond proxy currency

and then there were situations and you

you would look at your book you would be

long bonds and they say oh I really like

the yen yeah it's basically the same

trade okay and it it could be very far

away geographically you could be long

boonds in Germany and then say I like

the yen but then when you stress test

the correlations actually it's pretty

much the same thing these days not

anymore but back then it was like gold

and real interest rates for example you

have cert certain things that were very

correlated and today you will still find

macro factors that drive a lot of

tangential ideas. So that is not very

hard to do to shrink your universe back

down to 10 or 12 ideas. Actually it's

hard to get to 10 idiosyncratic

independent ideas

>> 100%. Actually now I'm thinking about

let's say the AI theme and every all the

bets implicit in that. I mean, you can

make the energy bet, which is still kind

of like a data center bet, which is a

bet that the that the LLMs are going to

get better and that more money is going

to plow into spend for compute. And, you

know, I can I can imagine that pretty

quickly, I mean, I'm thinking right now,

pretty quickly, um, all your bets kind

of converge onto one theme, and you

don't want that to happen. Um,

>> yeah.

>> How do you think about risk, you know,

for for for all these different bets,

right? Hopefully they're truly

independent. But let's say given that,

right? I know you size based on

volatility, but what do you do when

there are those truly call them black

swan events that no one really saw

coming? How do you deal with those

situations?

Okay, so this is a very good question. I

would say

so we talked we talked about

standardizing at the single trade level.

We're talking about making sure your

portfolio is robust. So you're running

as much as you can idiosyncratic vectors

of risk in your portfolio also in the

tales by the way and also in tail

events.

We talked about stop- losses to make

sure that each trade doesn't lose more

than XYZ% of your assets. And now you're

asking what happens if your stress test

back test whatever goes wrong. Yeah,

which will happen. And then ultimately

you have a an event something that just

punches you in the face very hard. So

what do you do then? Um

so I would say that the the most uh

immediate answer is you use a handbrake.

Like you're driving a car, your standard

uh pedal brake doesn't work. You

actually will go to your emergency

brake, right? Your handbrake and you

will just use the handbrake. What is the

handbrake? You have to reduce risk. I

look I learned very early in my career

that buying out of the money hedges

proxy you know for example you're long I

don't know the euro in big big size and

then to hedge this you're going to short

I don't know a proxy currenis whatever

for just giving you an example right or

you're going to buy puts on the Swiss

Frank or something like this man like

this proxy hedging proxy trading it's

it's very very risky because you're

counting on some correlations to to

really be there when you need them to be

and sometimes they won't. And so

ultimately you not only didn't hedge

your underlying exposure, you ended up

adding an additional wasting additional

premium some something else for an

option. Or as my initial mentor always

told me, if there is too much risk that

is either hitting you in the face or

your models are saying you're running

too much risk, just cut the risk. Just

cut the risk. And so what that means is

you're going to use a manual handbre

which is you're going to reduce your

positions. So there will be certain

thresholds when it comes to drawdowns uh

that you have to respect and you will

have to say look my models were not or

predicting this is a very low

probability scenario but it's happening.

We are not running model money. we're

running the you know actual dollar P&L

and if the dollar P&L moves in a certain

way then ultimately you will have to um

use the emergency break which means you

will reduce your positions you will

reduce your realized V and it's also

very important I think for people that

manage money to understand the power of

negative compounding a lot of people

talk about upside compounding which is

very powerful but the mathematic is very

simple if you have a $100

and you have a 10% draw down, you go to

$90. The amount of percentage return you

need to make to get back to $100 is not

10%. It's more because 10% of 90 is

nine. So you go back only to 99. And the

math gets worse and worse the bigger

your draw downs are. So it's seriously

it's imperative to avoid drawowns

especially if those drawdowns are coming

from uh exogenous events uh black swan

as you call them. Um

Trump has been a very complicating

factor here because effectively what he

has done we say he the future university

models of uh the CAPM model for example

they will have an additional error term

which is the Trump error term I mean

[laughter]

is is really a big and exogenous vault

injection variable in anything it's very

very hard to model I mean frankly like

especially when he when he started in

2025 with the tariffs, etc. There was no

um historical reference for a period

like this, right? So, this is a good

example, Ethan, for what do you do?

Well, I'm sorry. If you're losing X

amount of money, then you're going to

have to use the emergency handbreak.

Even if your model didn't see it

happening, it doesn't matter because the

mathematic of recovering from draw downs

is is is quite bad. I mean, yeah,

Liberation Day, like he's he announces

everything. Um, over the weekend, radio

silence, you see the articles that

everyone's trying to call Trump, right?

And and so, I mean, I think a lot of

people were convinced he was going to

rewire the entire global financial

system that weekend and then it bounced

back and then there's volatility a bit

later, but it was truly truly a wild

time. Um, and yeah, I mean what you say

about managing risk and

not adding on those proxy bets, um, and

that those proxy bets can be can

actually increase your actual risk

exposure. Um, I agree and

I guess I'd like to hear your thoughts

on the

quantitative models for say fundamental

risk management. So, I want to hear your

philosophy on, let's say, the pod shops

and the way they manage their factor

exposures, right? Because I hear mixed

views on things like these. I recently

had David our on my podcast and he was

saying that he thinks it's a load of

like it he thinks I mean partially true,

but mostly a load of crap. Um I've had

um uh you know PM exMs from the big

multi-managers and they say that you're

held to the risk model and in private

conversations they say that that in only

focusing on the idio that's what you

have skill in predicting. I also talked

to hedge fund managers who think that's

a load of nonsense. What are your

thoughts?

>> Well I need to understand exactly uh

what the question is because this is a

very delicate topic Ethan. So

>> sure go. So

>> what's the question exactly?

>> Okay. Specifically, what do you think

about enforcing a factor neutral mandate

for risk management?

>> I'm on the record, but I am uh one of

the very strange and transparent people

in this business. So I'm going to join

the load of crap um wagon here. Um I

mean look

um

first of all for a micro uh manager in

general it's

not particularly relevant I would say I

mean the first important rule that

actually you should try to preserve is

to avoid downside equity beta and

something that what it means is that

when the S&P 500 is drawing down a lot

then you shouldn't draw down a lot too

okay because otherwise the allocator

that is allocating to a diversifying ing

strategy doesn't want you to have a draw

down simultaneously with the S&P 500 and

I would say that's a very fair demand

from from an allocator and indeed that's

the case but when it comes to a micro

fund I mean this factor mutual thing is

is it does doesn't make any sense

actually I would say the job of a macro

manager should be to somehow have uh

skills in uh identifying when a specific

macro factor can be the value factor it

can be the bond market factor It can be

carry, it can be I don't know equity

beta on the upside. It can be anything

really. Uh but to time it well. I would

say time it well, ride it in a

diversified way. I think this is one of

the main skills of a macro manager. Now

if you run an equity long short

strategy, okay, then I think things are

a little bit different and there is a

recent article from the Financial Times

that shows that the rolling correlation

of equity long short uh managers to uh

the S&P 500 is very high. Now obviously

if you're an allocator, you don't want

that, right? I mean ideally because

factors these days are so commoditized

and so easy to access you would also

like this person not to just be a

momentum chaser you can just buy the

momo whatever it's called

mtum momentum media I mean you can just

basically buy this proxy for factor for

very cheap yourself so you don't want a

manager to be able to do to just do that

right as a as a one-trick pony so I

think for an equity long short it's

harder because equity factors are very

popularized very very popularized uh

instead

>> try to look for a diversified

really diversified carry global carry

factor so that does carry across

interest rates commodities effects

whatever other type of carry you have in

mind it's actually pretty hard to find

in an ETF format so the problem is that

equity long short people can easily

access factors that are very easy to

replicate so I understand from a certain

perspective an allocator that says look

I also don't want that but then it

becomes some sort of a religion to be

honest and for the same reason a

micromanager

should be rewarded for being able to

identify when a specific macro factor is

particularly cheap or expensive. I also

might extend this saying that an equity

longshot manager should not be fully

forbidden from taking a specific uh

equity factor view. I mean if it's a

one trick pony then it's a problem I

would say because you can easily

replicate that factor with very cheap

fees but I think we are a bit

exaggerating I think the multi manager

world has popularized this factor beta

fully like fully factor neutral version

a bit too much and I think at the end of

the day if a manager has a clear process

to tell you how it identifies

cheap or expensive factors and it tries

to write them. I think there is nothing

organically bad about that.

>> And so

for macro investors, you've said that um

it's about like you are like you were

literally paid to to ride those trends,

right? um to ride those those those

global factors um in the way in a way

where those

in in a way where allocators can't

exactly access that um in an ETF form. I

guess I'd like to hear about what it was

like in the early days raising money

from allocators, you know.

>> Um I would say this is a very

interesting process. You will never be

prepared for it. Uh you can read as much

as you want but it's a a lifetime

experience

that I recommend people don't take on.

No, I'm just joking. It's very very

intense. It's very very intense. So the

amount of preparation necessary is

large. Uh the amount of regulatory

uh things to check is also very large.

Um I would say first of all you need a

team. You can't do this alone. Uh second

thing is

investors

that are able to uh really participate

in what I call day zero investments. So

that means you open the door and you

have an investment in from a specific

investor is very very low at an

institutional uh level and I mean I mean

large tickets or seeding tickets as

they're called. The amount of investors

and allocators that have that capacity

is very low. uh they always need you to

be live for a few months and be sure

that on the infrastructure it all works.

You know they basically they call

themselves day one investors. The

reality is that they are day 180 day60

type of investors. The usual model is

something called u GP GP stakes model or

seeding model that I don't like. Uh the

model is basically paytoplay. uh not

only you give me cheap fees which is

completely fine uh for initial investors

but I as the allocator will take uh

stake in your management company. So I

will forever or almost forever be

entitled to a portion of your management

fees and performance fees on every other

asset you will accumulate when you're

successful. So basically you become some

sort of a venture capital investor,

right? Like a series A type of of

investor and you also somehow undermine

the independence of the manager because

you effectively have a voting uh right.

I mean you're you're you're an equity

shareholder of the management company.

So that is the most easy way to get

started. It's not easy anyway. It's very

hard but it's still one way to get

started. The other way is um yeah,

you're a spin-off from a multi-manager

and then everything is much easier

because you know probably the multi

manager will back you in the first place

right at that point because if you're

spinning out from them it means you

haven't been fired which means that you

have made a decent amount of

riskadjusted money so that means they

have an interest in in sitting you

anyway. Um and then there is the third

route which is much longer and much more

complicated which is you share your

framework, you share your investment

process. um with people um you do it for

free, you do it for a long time and then

people get accustomed with how you think

about risk management and you think

about investment opportunities

and that is what I went through. I have

to say this is not something that you

can say okay I'm just going to go like

this let me see what are the what are

the the let's say the prior examples

okay because the the prior examples of

this would be Ray Dalio in the 1970s I

mean what he did he had a research

company was showing his way of

understanding the world and thinking

about trades to a bunch of investors on

a research basis and then somebody

seated him with the equivalent I think

of $5 million non-inflation adjusted so

today will be probably 20 or $30 million

and then Bridgewater got started.

It's not very often that you'll find

that by sharing your investment process

you become visible enough online um or

through various you know LinkedIn or

whatever so that you can attract such an

audience that ultimately will perhaps

look into your ideas and decide to

invest as they zero investors. It is

very very hard Ethan that's what I went

through and we we managed h but it's a

process that

requires a lot of time requires

the understanding you can fail it's

actually very likely you will fail

especially if you don't accept uh seed

money with the GP stakes attached to it

it's very likely that you will fail

uh the other model uh which is the

fourth one is to run your own strategy

in a transparent way maybe let's say on

Interactive Brokers on something that

could be audited, could be audited, and

then run it for at least three years

with a decent amount of capital. Let's

say a couple of million minimum, and

then run your strategy, and then uh

hopefully be able to convince some early

investor that your strategy can be

replicated at much larger scale and that

you are also not only a PM, but that you

are a business builder. Because the real

problem with um funds in general is that

one thing is to run the portfolio. The

other thing is to run the business. The

amount of things that are necessary,

this is a very mature big business

you're talking about here. You have

operations, you have hiring, you have

people to manage, um regulatory u setups

to manage, uh operations, prime broker,

settlements, I mean this is a huge

business. And then you have the uh

capital part. I mean what capital are

you going to accept from whom? who goes

into a specific share class and when do

you close your fund what is the capacity

also strategic thinking around your your

business sales sales namely who talks to

the investors people that are interested

in your fund and who talks to them uh

who manages the investor relation cycle

I mean this is a huge business and you

have to have a business acumen you can't

just be a portfolio manager that wants

to have a fund that's not going to work

if you're a portfolio manager you're

better off going to multi manager to be

honest because the business side of

things is huge. It's absolutely huge.

>> What was the biggest shock or biggest

surprise to you when starting Palinura?

>> Biggest surprise was

um

I would say the

I underestimated the amount of u

procedural things that were needed. I

mean it somebody tried to warn me before

and say look I mean if you're starting a

fund then this and this and this and

this and this will be necessary and it

was a long list of this so the points

were very long but nevertheless you tend

to underestimate the uh the launch

period I mean I I I hear sometimes

friends you know some people reach out

and they say oh I'd like to launch and

you know I'll take a three months launch

period what it's never going to work

like anything less than a year it's

absolutely uh ridiculous unless Unless

you really have again if you have a GP

stakes then uh cedar then probably they

will also have contacts and then

therefore a lot of this will be

facilitated but if you're really

starting from scratch and you own 100%

of the management company and you don't

have any external amazing cedar or GP

stakes deal then less than a year is

absolutely unthinkable to be honest

>> in our preall you know you were telling

me that you liked the episode that I had

released with Claudia uh Contella

>> um where she talked extensively about

how the business building side is a

different beast to just running your own

money or running money at a fund as a

PM.

Um

and you know I can't imagine how hard it

must be to do that solo. Yeah.

>> How big is your team by the way

>> for doing that?

Um at the moment it's four or going to

be five at some point but it's look I

mean the business side of things it's

when you're when you are uh what they

call these days an emerging manager

that's the terminology.

The investor relation cycle is extremely

long and it's correctly so because what

happens is that people will find out

somehow about you maybe the prime broker

maybe they will find out in another way

and then they uh you know will want to

start a conversation. You will have

about maybe 10 to 15 touch points

minimum 10 to 15 touch points until

you're able to even remotely imagine

them being an investor. And this is not

because you know, oh, they just like to

spend time with you. No, no, no. They

have a big list of check checklist to go

through. I mean, they need to do

physical due diligence. They need to see

you in person. They need to really

understand the risk management that you

apply, the operation, the uh investment

due diligence, operation due diligence.

And also they want to hear the way you

think about markets. So they need to

really follow in some cases they have

some you know track record requirements

as well like you need to have 18 months

or three years but basically you need to

be prepared to share with them share

share share and also ask for nothing

back that's the most important thing you

are developing relationships and these

relationships will take years on average

until they turn into something if they

turn into something by the way um and I

think a lot of people are prepared for

this. They also think that they start

they have a good year and then

everything is going to sort out by

itself you know because everybody can

see I have a good year so why are not

are they not investing well I'm sorry

but they need to know your process your

team they need to get to know you and

this takes time so

the financial side of launching is also

very important I think because the um

runway that you need to be able to have

with your team is needs to be very big

very very long and this is also by the

way something that investors care about

especially in the early stages they

really want to know you know for how

long can you carry on here credibly

because otherwise we don't have a

business case to invest in you in the

first place so these are the things that

there is no handbook for launching a

fund uh and these are things you only

learn by experience uh it's a fantastic

experience to build a business I mean

like you really learn all the possible

angles that you can imagine

challenge is that you not only have to

do that but you also have to think about

your strategy and run your book etc. So

it is very very intense.

How do you structure your now this might

be a a big question but how do you

structure your life to where you can

think about those two aspects of

Palanuro extremely clearly

life my life is a mess no I'm just

joking um so look I am the anti-

optimizer

routine guy okay I was born in southern

Italy we wake up when the alarm whenever

the sun goes up uh you know it's frankly

you need to be very effective. That's

what you need to think about. Your time

needs to be attributed in a specific and

very intentional way. Uh also you need

to delegate. Delegate very hard. You

need to have great people around you or

otherwise you won't be able to follow

all the angles appropriately. Uh so this

is those those things are not

negotiable. You need to be very

effective with your time. uh you need to

spend the right amount of time into

things that you might think are not that

relevant. For example,

uh communicating with your investors and

potential investors. Very very

important. You need to spend time there.

That means you will have less time than

you think probably to look every single

minute at the market. First of all, I

would advise people not to look every

single minute at the market unless they

are high frequency traders, but for us

it doesn't really fit anyway. But that

means you need to be able to delegate.

you need to delegate and you need to

have a smart and trusted team around you

and then your day will be in general

pretty long. I have to say that also has

to do with time zones. I mean uh one of

the beauty of um the world we're in is

that it's globally connected now. So

before it I imagine that it used to be

quite hard to get somebody from Asia or

some other continent to speak to you and

these days it's equally easy to get

somebody from Asia or New York to speak

to you. Time zones are also something.

So it's long days. Um but frankly the

other most important thing is you need

to be very very very passionate about

this. And again people hear passionate

about oh yeah of course I like to manage

money and think about strategies. Yes,

but that's maybe 30 to 40% of the job.

The remaining 50 to 60% of the jobs is

make sure the organization is

structured, the ops are running and that

you're talking to your investors,

potential and actual investors. And this

part I think is very very much

underestimated.

>> I love the anti-optimization

and the just do it bro mentality. Um and

what you said about just loving the

game, right? Um because I think all

those things there's so much status

associated with saying I'll wake up do

this you know comprehensive routine to

maximize a particular aspect of the way

my brain's working right and then on the

other end what you said about actually

loving the work and you giving the

example of oh yeah I love to manage

money. Um, I would even push it further

in that I feel like a lot of people are

very much just focused on the status of

certain jobs, right? Um, especially

hobbyists. I'll let you rant. Go on.

What did you want to say?

>> No, but there is no status. I mean,

what's the status? The status is you're

a grinder. You you are basically like on

a hamster wheel. There's no status,

guys. I mean, let's be honest here. What

you're trying to do is build something

that maybe in five to 10 years, maybe in

five to 10 years will look like

something that is an organization where

you can focus exactly on the part of the

business that you like the most. Could

be that you are better at uh or you are

more happy looking at markets and

thinking about investment framework and

risk better. Might be you're happier in

managing people and processes. I don't

know what type of person are you. Uh but

it's going to take a long time anyway.

In the meantime, there is no status. I

am sorry. There's just a lot of work. Uh

you have to uh juggle in the air a lot

of balls at the same time. And it's it

looks very glamorous from the outside.

But there is nothing glamorous. There is

a fiduciary responsibility by the way uh

that you have to fulfill. There is a

business you're trying to build. There

is communication with investors. There's

operations to be taken care of. And I

think the business side of things is

very underestimated

>> for emerging managers who are listening

to this podcast right now who

say manage their own money thinking

about launching a fund not exactly sure.

Can you give a picture into the worst

day you've had on the job to to to paint

I guess to paint a picture in their

heads about you know if they hear that

and say I still want to do it then maybe

this is for them but if they hear that

and go absolutely not for me I guess can

you can you paint a picture into that?

W

yeah I mean first of all is

I know that it's very hard to convey

degrees of emotions to people but I

would say this is one of the things

where you really need to think very hard

about whether you want to do this or

not. The financial runway necessary is

also very very big. So you have to be

very comfortable either with risk as a

person that means the people around you

have to be comfortable with risk as well

or otherwise you have to have specific

features and requirements to be able to

try. By the way there are um public

statistics uh something like 80% of the

funds fail in the first five years.

80% 80. So you know you're odds are not

looking very good I would say for this

but in general so if you're thinking

about it take this statistic into into

perspective

and then

I mean there will be during the launch

phase which I would recommend it's

minimum one year um there will be

periods where you think that you're not

going to be able to do it. I mean I

shared as well uh on LinkedIn this is

something interesting by the way I get a

lot of feedback on this like oh but I

mean you're sharing the journey like

every step of the way or almost every

step of the way yes I mean there is

including the moments where I thought I

was not going to make it um there is a

moment somewhere

summer 2025 so somewhere halfway uh the

launch period where it was looking like

we're not going to make it we were not

going going to have enough um investors

at the door to make this a financially

viable project in the first place.

So what do you do? I don't know. You can

just keep fighting and hope that

ultimately by I mean it's all about uh

communication like if you have people

having cold feet that makes a lot of

sense to be very honest. If something

ops goes wrong when you're trying to

launch that also is possible but it's

it's an endeavor where you have to

assume the probability of failing is

very high frankly and I know this

doesn't sound extremely motivational but

I think my job my job my the way I live

my life is I am extremely honest and

transparent about everything and if you

ask me the question Ethan then I'm going

to tell you that it's a very low

probability of of uh of succeeding

effort and also

you go into this you have to know that

your distribution of riskreward is very

skewed against you. Um and also you have

to know that assuming you succeed a lot

of the work that comes after is not what

you think it is. It is not only managing

the book and thinking about what

fantastic investments I'm going to be

making. That's a relatively small part

of the job.

>> Wow. Very encouraging.

[laughter]

Hey, there is also the positive side of

things as I say. I mean the more you

develop um there's a lot of path

dependency by the way. I mean uh the way

you start is very important which is

completely random. Of course there is

variability of of performance. I even if

you have a sharp ratio of three there is

a chance that in the first six months

you have a draw down. I mean it's just

the variability of returns right yet it

is very important. It's very path

dependent I think in the beginning like

you you have to be lucky I guess to a

certain extent that you start well if

you start well then you have momentum

that generally helps I would say the

overall thing uh the real satisfaction

that comes out of this is the

ability to build and shape something of

your own. So that means the strategy is

effectively decided and agreed with uh

your investors but you don't have any

external stakeholders from that

perspective. You have to have make sure

that you have an aligned LP base of

course with the uh with the strategy. Uh

you can shape it the way you imagine it

which is just an amazing feeling to be

very honest compared to sitting as an

employee at a multi-manager. It's not

bad but it's a very different experience

probably from this one. So, and it's the

journey. You have to love the journey,

man. If you don't love the journey, then

frankly, don't even try. Uh, but the

journey is very fun. You learn a lot.

Your learning curve is very steep both

on markets and on business building and

on how the industry works. So, it's also

very nice to be honest. But the to get

to the nice part, it's a nightmare. I

mean, there's no way around this

>> in building Palinuro.

And I actually think I should have

phrased my question about how do you

structure your life um more like this

because this is the question I really

more so wanted to ask. How do you

maintain clarity of thinking? What with

regard to

idea generation, bet sizing? Yeah. How

do you maintain clarity there when you

also have to think about communicating

to investors ops? All of which, as

you've said, is at least 50, you know,

at least 60% of of the game.

>> Mhm. Yeah. Well, as I said before, you

can't do this alone. You have to have a

team of people that are very well versed

into the process. By the way, they're

improving the process every week because

you always find out something that

hasn't worked or can be improved.

uh if you're thinking about just being a

oneman shop and and launching this,

there are ways that you can do this, but

I would think this is very suboptimal

and not scalable over time. Um

again, if you're only a portfolio

manager, then yeah, probably that's

easier. Uh but if you are in the

business uh of building, then it's

completely different. So you also have

to understand that um there are

different line of business to be

allocated. There is uh let's say the the

managing of the investments and the

risk. There is the uh operation part,

there is the regulatory part, there is

the uh investor relations part. I can go

on and on. So you should think about

this in general as a business with many

different functions while people tend to

think about just one function. If you

talk about uh fund and fund management

then generally people think it's only

one. It's only you know the most

glamorous thing that they can imagine.

that I have to, you know, bring people

back to reality. It's absolutely not

only about that.

>> If you were to go back to the day you

decided you were going to launch a fund

uh to found the day you decided you were

going to found Palonuro,

what would you have done differently?

>> I mean, there are a few things that I

would have done, but the problem is that

you need to have the financial resources

to do them. So that's this is it's

always like um I hear sometimes or I see

oh XYZ launched the fund and then you

basically realize it was a gigantic

family office with you know a lot of

wealth sitting in there. Yeah. Okay. But

that's obviously you have much more

alternatives at that point right you can

basically choose you have much more

capital to put through the launch. So it

really depends from your uh I would say

initial situation. My case I think

overall it went pretty fine. Uh so I'm

I'm not sure that there will be big

things that I could have done in the

sense that I had the material

opportunity to do them differently. Um

it is even in my case where you can say

oh this was effectively successful.

You still have to uh

you still have to expect a very rocky

path to get there. uh and also frankly I

mean there is an answer to this question

Ethan but it depends from how much

capital do you have to put through the

launch so there are different levels of

uh you know spending power that you have

through a launch it really depends from

your situation in the broad uh thing

that I would like to say is there is

never enough prep work guys for this

there is never enough prep work one

thing for example you can talk to more

consultants more law firms more service

providers how How many did you did you

talk to? Five, talk to 10. Because there

is there is no handbook on how to do

this. Which means you have to gather

intelligence yourself. And the more you

speak to service providers or other

people that have gone through the same

rocky path, the more information you

will have to make sure you avoid costly

mistakes. Basically,

>> learning by motion. I imagine that's

what it is, right? Just doing more of

the thing.

>> Yeah. Yeah. I would have never imagined

to know the amount of things I know

about ops and other things that I know

now. But it is as well I was I knew that

it was going to involve a lot of that

but I was massively underestimated the

amount of effort that takes into that

hiring as well. I mean like the people

that you choose to be part of your team

basically can't make any mistakes. You

just can't. It's impossible because in

that phase, in the initial phase, which

by the way lasts at least three to four

years before you start to maybe become a

more mature business, wow, the the human

capital, it's it's everything. If you

make one mistake in hiring, you are job

dies in your business. Seriously. So,

yeah, that's something else to pay a lot

of attention to.

>> How do you hire great people when in the

early stages you just don't have the

budget that the large multi-managers do,

large hedge funds do? Yeah, correct. I

mean, that's the

how can I answer this question? I mean,

in general, you have to have people that

want to work with you, not for you, with

you. And that's the most important

thing. You need to be able to inspire

them towards a common mission. You need

to align incentive schemes, by the way,

because people don't pay their bills

with inspiration. They pay the bills

with the actual alignment of dollar

incentive schemes.

Uh, yeah. And you have to be able to

have qualitative uh hiring skills which

basically means you have to try and get

a prototype of the type of person that

you want to hire. So who is this person?

In our case, for example, we prefer

people that have a background

growing up or having family with roots

uh in places where the GDP per capita is

not higher than $30,000 a year. So why

is that? Because people that grow up or

families that grew up in these places in

general, they tend to give an education

and experiences to young kids that are

in general about

um doing 110%

to get what you deserve. You have to

work very hard in places where GDP per

capita is lower, unemployment rate is

higher.

You have to have an extra gear. You have

to really go for it. It's much harder.

It's much more competitive. So, you're

shaped in uh in in working hard and also

in in having an empathetic attitude in

trying to help the other person because

it's generally speaking those are less

individualistic um cultures. There is

not always a one-on-one correlation, but

it can happen that places that have a

lower GDP per capita tend to be places

where people are more empathetic. They

are more uh they work hard, they're

friendly, they try to connect with other

people. So, we have found this to be a

pretty good principle. Doesn't mean

we're not going to hire somebody that

grew up in Swinton. I mean there's

nothing bad about that don't get me

wrong but it's uh just one qualitative

thing that generally tends to uh resound

well with my soft values but everyone

should have its own hiring framework but

there should be a hiring framework

that's not something I've ever heard

before but I'm thinking about it now and

I look at the large multi-manager hedge

funds and their culture is built their

business is built to thrive in a place

like the US, right? Where it's truly a

dog eat dog environment where it's

performers

get rewarded and get hailed as almost

these kings, these titans of finance and

if you don't perform, you're nobody,

right? I walk around New York and you

know I won't say the name of the

celebrity but I was in the subway with

friends and I saw you know model top

model who you know everyone would know

or recognize and homeless man in the

same um in the same car subway car and I

was just thinking to myself wow this is

truly the city of extremes the US is the

country of extremes the nation of

extremes and I think that it allows

these businesses to thrive whereas I

don't think the type of model would work

in in another place where the culture

isn't wired that way.

>> I think you're right. Um,

in general, I'm not here to make a

judgment on whether the New York or

London or whatever it is model is better

or worse than any other. But it is a

specific model where you need a specific

type of personality to fit very well in

that model. If you are building a

business,

I I'm not sure that that type of

personality will be the best fit. I

would say in general, you need to have

people around you that are willing to do

everything necessary. I mean, we

literally screwed our own uh desks. I

mean, I'm sorry, but it needs to be

done. Somebody got to do it, so well, we

just do it ourselves. I mean, you need

uh this type of hands-on attitude. You

need people that are

willing to go the extra mile without

making, you know, some sort of extra

effort or holding above your head that

they are, you know, working and setting

up their chair and their desk by

themselves. It's just part of the job,

guys. I mean, and girls, in the

beginning, it's effectively a startup. I

mean, what I'm describing is a startup.

And there is nothing different between

trying to launch a founder, launch a

startup. It's pretty much the same. you

have to launch a business from scratch,

which means you probably want fully

motivated, fully aligned people with

specific personality traits. And I'm not

saying that the perhaps more

individualistic or as you call it doggy

dog uh mentality is worse or better.

It's just one mentality. We prefer a

different type of approach. But

generally speaking, there needs to be a

hiring framework. You need when you

hire, you need to be very intentional

about what profile of person are you

want to are you trying to bring on

board.

>> Yeah. And I guess if you mix the the

different types of personalities and

cultures, that can really create

misalignment. I mean, I'm thinking you

bring the standard New Yorker Ivy League

high performer who most most definitely

is a high performer and you mix that

into a culture where people are more,

you know, care more about each other,

more empathetic. Um, yeah, I don't think

it would work the same way. Um, and

>> you know,

>> nothing nothing bad about you guys

listening from New York by the way. It

is just

>> it's there's nothing and by the way it's

a very big generalization. I mean there

will be people in New York that also fit

this type of different approach. Um, in

general I want people to understand you

need to be very intentional about hiring

the way you need to be very aware of

your time being spent on investment as

as much as your time being spent on

other type of endeavors. the runway you

need to have. This is something Claudia

also talked about in your prior episode.

These are all very very relevant things

to know in case you're thinking about uh

taking on this very

low uh probability of success endeavor

we are discussing today.

>> Last question. you have a pretty call

that's more unorthodox background in

that you're in media and then launched a

fund and all I mean having worked at the

bank then launched a fund um and now

hopefully growing that fund and um and

and constructing your port constructing

your portfolio of macro bets uh you know

if someone wants to sit in your seat

let's say 20 years time right or 10

years let's say they can do let's say

they can do it quickly you know even

though you've said you takes a long time

to do things and to learn. Let's say

they can do it quickly. To a young

person who wants to sit in your seat,

what advice would you give them? Uh yeah

there is a clear advice that probably

they haven't heard yet which is that

you might be very smart or very

successful in whatever technical things

that you are studying or you're doing

but if you're not able to communicate

properly you're going nowhere. You're

absolutely going nowhere. So the amount

of time that I spend still every week

and every month intentionally on trying

to improve my communication skills,

it's it's very high. And the reason why

is that you might have the best ideas.

Not that I have them, but you might have

the best ideas. You might be very

technically oriented and very

technically smart, but at the end of the

day, you need to be able to talk to

people and show them what you're doing

and show them why they're supposed to

look at you rather than someone else.

This is a world where also sharing not

only on the sales side, but also sharing

value with people is very important. To

share value, you might have a great

idea, but if you're not able to

communicate it properly, then it's not

worth as much the same idea. So if I

were a young guy or girl, I would be

very intentional about improving my

communication skills. And it's a very

broad area. It means presenting or as I

like to say performing rather than

presenting because presentation seem

like these things where there's a

PowerPoint and you read the PowerPoint

aloud. I'm sorry. Sorry. No, no, no, no.

We're talking about we're talking about

storytelling. We're talking about being

able to engage with your audience. We're

talking about intentionally thinking

about what are you going to talk about

and how are you going to convey the

message.

These things are equally important to

succeed in any business to be honest,

not only in this one as your technical

skills are. I know this sounds a bit

crazy but it is the case.

>> Yeah. And I'll I'll end things Yeah. I

think that's great advice and I'll end

things with a quote from Ken Griffin. Um

if we're all going to eat, someone has

to sell. Thank you very much for coming

on the podcast, Al.

>> We'll be back soon, I hope. Maybe in a

year or so.